Silver: Down as industrial commodities tumble
Performance:
Spot silver rallied over 4 per cent in two days in the run-up to the FOMC meeting concluded on August 31. The white metal surged on expectations of clear rate cut signals as the US job market and the economy do not look so strong presently.
The metal tried to extend its rally on the first day of the month as traders construed the overall FOMC outcome to be dovish; however, notwithstanding sharp decline in the US yields, a traditional driver for the metal, it rather tumbled as very weak data out of the US and China cast doubt on demands for the commodities.
Spot silver was trading at $28.35, down 2.27 per cent on the day, at the time of the MCX closing, while the MCX September contract at Rs 82,620 was down 1.17 per cent.
US yields and the Dollar Index:
Ten-year US bond yields fell for the sixth consecutive day on soft US data. The yields were at 3.98 per cent, down nearly 3 per cent on the day, at the time of writing this report. The two-year yields were down over 2 per cent to 4.18 per cent as the yields slumped for the third straight day.
July was a great month for the bonds as the yields dipped sharply on rate cut anticipation amid weakening US economy. The ten-year yields were down 37 bps, while the twos fell around 50 bps.
The US Dollar Index at 104.40 was up by around 0.30 per cent.
FOMC outcome:
The US Federal Reserve, as expected kept the benchmark rate unchanged in the target range of 5.25 per cent-5.50 per cent for the eighth straight meeting as the FOMC cited risks to both the sides of its dual mandate of maximizing employment rate and keeping inflation rate around 2 per cent. The statement showed a slight deviation as earlier the Fed was focusing largely on high inflation risk.
The FOMC statement showed the balancing act of the Fed; however, the Fed Chair Powell’s presser was construed as dovish. Powell said that the neither the US economy was overheated, nor the job market was that tight anymore. The slowdown is the job market was gradual.
He added that the Fed may act in case the job market weakened at a disconcerting pace. He talked about possibilities of multiple scenarios in which rate cuts could range from zero to multiple rate cuts, which was taken as a bearish signal by traders. The US bonds rallied further in his presser, which led the yellow metal further up.
Data and event roundup:
On July 31, The Bank of Japan, somewhat unexpectedly, hiked its benchmark rate by 15 bps to 0.25 per cent and halved the quantum of the bonds to be purchased; thus, the BoJ fuelled the Yen rally further. The Japanese Yen, aided by interventions and rate hikes, rallied around 7 per cent in July.
The US data released on July 30 and 31 were soft and disappointing. The jobless claims rose by 14,000 jobs to 249,000 jobs in the week ended July 27, which is the highest level in almost a year. US ISM manufacturing PMI (July) came in at 46.80 Vs the forecast of 48.80, which was the fourth straight contraction, and the sharpest contraction since November. Unit labour cost (Q2) and Employment Cost Index (Q2) increased less than expected; thus, boosting the possibility of multiple rate cuts, which benefited the bonds.
Earlier in the day, China’s Caixin manufacturing PMI data released on July 31 showed that the private sector manufacturing unexpectedly contracted in July for the first time October. Now, with both the public and private sectors manufacturing in contraction, concerns about demand for commodities are occasionally overshadowing the positive factors like falling yields and the US Dollar.
On August 1, the Bank of England voted 5-4 to cut interest rates for the first time since early 2020 and signalled further rate cuts ahead.
Inventory and ETF holdings:
The total known global silver ETF holdings stood at 714.47 Moz as of July 31, which is around two and a half-month high level. The COMEX silver inventory stood at 302.739 MOz as of July 31.
Upcoming data: Focus on the US nonfarm payroll report and the ISM services
The US nonfarm payroll report (July) will be released today. As the June report was weak and the Fed is paying attention to possible unusual weakness in the job market, the job report is quite crucial for the yellow metal. Similarly, the ISM services data, is also a key data. Weakness in these reports will bolster the rate cut notion as investors are concerned that the Fed is behind the curve so far job market is concerned. In that case a 50-bps rate cut in September is quite probable.
Outlook: Yields and Dollar supportive but economic concerns weighing
The white metal is getting support from the traditional drivers like the US yields and the Dollar Index; however, weakness in the Chinese and the US economies is outweighing the positive developments at times. Nonetheless, buying the dips with appropriate stop-losses is likely to be preferred strategy as the US nonfarm payroll report looms. Weak job report will boost the multiple rate cut odds, which should eventually favour the metal unless the economy becomes too weak.
Support is at $28.20 MCX September contract Rs 82,200/$27.20 (Rs 79,200). Resistance is at $29.50 (Rs 86,000)/$30 (Rs 87,400).
Disclaimer: Praveen Singh is Associate Vice President of Fundamental Currencies and Commodities at Sharekhan by BNP Paribas. Views expressed are his own.
First Published: Aug 02 2024 | 10:11 AM IST
